The economics and politics of instability, empire, and energy, with a focus on Latin America and the Caribbean, plus other random blather and my wonderful wonderful wife. And I’d like a cigar right now.

June 14, 2013

Neocolonialism in Nicaragua?

So I got my hands on the memorandum of understanding, the deed of cooperation, and the framework agreement for the proposed Nicaragua Canal. All I can say is ... wow. It is somewhat, uh, lopsided.

Thus my political doubts about the proposal. This is such a stunningly bad deal for Nicaragua that I have trouble imagining it lasting. But then again, Mr. Ortega has run the place tolerably well and is riding high in the polls. His party has total control over the National Assembly and the next election is not until 2016. So maybe he can get it through, although something about this statue in downtown Managua gives me doubts.

On to the deed of cooperation! First thing, it establishes free trade zones at both ends under the control of the concessionaire. It is supposed include an international airport, or if that doesn’t happen, control over an expansion of an existing one.

Second, the concessionaire gets “title to all real and personal property to be transferred
by the Authority on behalf of Nicaragua free and clear of all liens or other
encumbrances.”

So far, this is not bad, although it might sound it. This is just standard for big private infrastructure contracts, including the promise of the “relocation and resettlement of any people and/or
communities currently situated in areas to be utilized by or in connection with
the Project.”

Nicaragua shall grant ProjectCo the right to use and receive
any and all economic benefits arising from the Canal and the Associated
Infrastructure (including without limitation the exclusive right to collect
tolls, tariffs and fees from the shipping and freight utilizing the Canal and
any party utilizing the Associated Infrastructure) for the period starting upon
the date hereof and ending on the date which is fifty (50) years after the commencement
of operation of the Canal, which initial term shall be automatically and
without any additional consideration from or costs to the NewCos or the Sponsor
extended thereafter for an additional fifty (50) year period in the event that
ProjectCo provides a written notice to the Authority at least six months prior
to the expiration of the initial concessional period.

ProjectCo is a special purpose vehicle (formed under the laws of any country) to operate the Canal. The Sponsor is the HKND Group. The Authority is a semi-autonomous arm of the Nicaraguan state established by Law 800. NewCos refers to both ProjectCo and the holding company that will own the shares, e.g. HoldCo.

Let us continue. Anything else?

The Authority and Nicaragua shall grant protections and
safeguards to each of the Sponsor, HoldCo and ProjectCo against any changes in
law (including, without limitation, tax, corporate and real estate laws of the Republic
of Nicaragua) law enforcement, environmental standards, consents, decrees,
policy and regulations and any court order, decrees or judgments.

And:

The Sponsor and each NewCo shall each enjoy exemption from
Nicaraguan corporate and income taxes and exemption for themselves, their
affiliates and financing sources and the Project from all charges, fees,
withholdings and assessments and any other taxes and duties.

But how can HKND be sure that a future Nicaragua government won’t change the rules? Well, they are planning for the year 2113, so maybe they will just send in a robot army. But that seems like a long-shot. So instead they promise to give HKND the protection of Nicaragua’s bilateral investment treaties. See the above clause where the NewCos could incorporate where they like? That means they get to pick the best one of Nicaragua’s treaties, which you can find here.

And that brings in the power of ICSID. Already Nicaragua would be risking Chinese retaliation. (Qianru Song and Rodrigo Wagner have argued that China worries little about expropriation because it stands ready to use harsh economic sanctions against violators.) But now it would risk huge legal knots from every country that had signed the New York or Washington conventions.

So far, we have that the Nicaraguan government gives HKND full property
rights over the Canal for 100 years, including title to all property,
plus a form of extraterritorial privilege in the free trade zones. Plus full tax exemptions and recourse to international law to make sure that nothing but nothing changes between now and 2113 ... actually, a bit longer, since that 100-year clock starts ticking when the Nicaragua Canal starts operation, estimated by proponents as eleven years after construction starts.

(So call it 2124, when the robotic ships will be carrying ... what? Raw materials for 3-D printers now that the war between Russia and Nunavut has shut down the Northwest Passage? I kid, but the point is that there is something fundamentally ridiculous about a 100-year concession.)

What does Nicaragua get in return? Well, it gets $10 million per year from the start of operations. They are also get a 1% initial stake in the business, but any dividends are deducted from that $10 million. A second 1% stake is to be used by the Sponsor for “philanthropic purposes in order to support social and
economic development in Nicaragua and/or in the name of the citizens of the
Republic of Nicaragua throughout the world.”

Nicaragua’s stake is set to grow by 10% every decade. So in year 11 of operation, it jumps from 1% to 10%. In year 21, it grows to 20%. And so on, until year 101, where it peaks at 99%, with the rest going to those “philanthropic purposes.”

The framework agreement adds a few wrinkles to the deed of cooperation. It has a few provisions that could be interpreted as giving HKND the right to set up its own security service. It also insures that arbitrations will occur in London, and that is important because London has some of the most powerful laws to use against international entities. (Arbitral decisions are first enforced in the country where the tribunal was held.) And it makes it clear that HKND can bring in whatever workers it needs to construct and operate the canal.

Finally, the framework agreement contains the most forceful renunciation of sovereign immunity that I have ever seen:

[The Republic of Nicaragua]
waives to the maximum extent possible whatever sovereign immunity that it might
possess, whether before an arbitral tribunal or procedure, judgment,
jurisdiction, adjudication or enforcement action, including the waiver of any sovereign
immunity for itself (including, should it be applicable, its ministries,
departments, agencies and independent organizations carrying out governmental
functions) and whatever of its properties, whether its own or any other agency,
regardless of the commercial or non-commercial nature, function or purpose of
such property. These assets shall include any bank account belonging to the
Party [e.g., Nicaragua] whether under the name of a diplomatic mission or something
else.

This all seems very familiar. I mean, there is no reference to a zone ... uh, except the free trade zones, and that’s different, right? ... and I don’t think that Nicaragua will be adopting the yuan or changing its constitution to allow Chinese intervention ... but wow.

For what it’s worth, that $10 million is more than the $5.4 million (in 2012 dollars) that Panama received from the U.S. under the Hay-Bunau Varilla Treaty. But this is set up to insure that Nicaragua will enjoy very little benefit from the canal until its second decade of operation, and even then the returns will be slight unless it turns out to be phenominally profitable.

Putting aside the problems with the business case (you can read HKND’s version here), I am not sure how you sell this contract to the Nicaraguan people. But perhaps President Ortega is popular enough and has a big enough majority that he does not have to.

Finally, two useful links. Here is a good news backgrounder by El País. Here is an invaluable run-down of the Chinese actors and the legislative background at Margaret Myers’ always invaluable China and Latin America blog.

Comments

I know you (probably correctly) think I use a too-broad definition of "imperialism," so I'm gratified that this arrangement seems a little bit over-the-top to you as well.

It's really the combination of the income tax exemption, 100-year term, and renunciation of sovereign immunity what stands out. The FTZ's are neither here nor there, depending on clauses that we have not yet seen.

As for the FTZ's, I'm not sure that the People's Republic of China was one of the countries that Paul Romer had in mind when he thought up the idea of a guarantor nation for a charter city ...

do you have any idea about the extent to which this is actually a serious proposal? So far all the legalities seem serious, but the proposal from a business perspective is so crazy that I have difficulty believing that it's not some strange political side show. Admittedly I don't know why Ortega would need a side show right now, so even if it is just a side show it would still be quite strange.

I don't know. There's something sketchy about the Chinese side, lending credence to the idea that there is not a lot of there here.

On the Nicaraguan side, I suspect the motivation is at least partially megalomania. The planners have already rejected the most ecologically-damaging route, so there isn't too much downside. (Other than the precedent set by that concession --- wow.) If it doesn't happen, it doesn't happen; if it does happen, not only will Danny Ortega's name live on into the 22nd century, but he will have quite literally reshaped his nation.

I can see why the chance at that sort of legacy might be attractive. I'd want it, were I president of a small poor Central American nation.